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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From .......... to ..........
Commission file number 0-19989
Stratus Properties Inc.
(Exact name of Registrant as specified in Charter)
Delaware 72-1211572
(State or other jurisdiction of I.R.S. Employer
incorporation or organization) Identification No.)
98 San Jacinto Blvd., Suite 220
Austin, Texas 78701
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:(512) 478-5788
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Par Value $0.01 per Share
Preferred Stock Purchase Rights
(Title of Each Class)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of the registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by non-
affiliates of the registrant was approximately $37,400,000 on
March 14, 2002.
On March 14, 2002, 7,115,995 shares of Common Stock, par
value $0.01 per share, of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement to be submitted
to the registrant's stockholders in connection with its 2002
Annual Meeting to be held on May 16, 2002, are incorporated by
reference into Part III of this Report.
TABLE OF CONTENTS
Page
Part I 1
Item 1. Business 1
Overview 1
Company Strategies 1
Credit Facility 3
Transactions with Olympus Real Estate Corporation 3
Regulation and Environmental Matters 4
Employees 4
Risk Factors 4
Item 2. Properties 6
Item 3. Legal Proceedings 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Executive Officers of the Registrant 7
Part II 7
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 7
Item 6. Selected Financial Data 8
Items 7. and 7A. Management's Discussion and Analysis of
Financial Condition and Results of Operations and
Disclosures about Market Risks 8
Item 8. Financial Statements and Supplementary Data 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 37
Part III 37
Item 10.Directors and Executive Officers of the Registrant 37
Item 11.Executive Compensation 37
Item 12.Security Ownership of Certain Beneficial Owners
and Management 37
Item 13.Certain Relationships and Related Transactions 37
Part IV 38
Item 14.Exhibits, Financial Statement Schedules and Reports
on Form 8-K 38
Signatures S-1
Financial Statement Schedules F-1
Exhibits E-1
PART I
ITEM 1. BUSINESS
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OVERVIEW
We are engaged in the acquisition, development, management
and sale of commercial and residential real estate properties. We
conduct real estate operations on properties we own and, until
February 27, 2002, through unconsolidated affiliates that we
jointly owned with Olympus Real Estate Corporation (Olympus)
(see "Transactions with Olympus Real Estate Corporation" below).
All subsequent references to "Notes" refer to the Notes to
Financial Statements located in Item 8 elsewhere in this Annual
Report on Form 10-K.
Our principal real estate holdings are currently in the
Austin, Texas, area. Our most significant acreage includes 2,039
acres of undeveloped residential, multi-family and commercial
property and 34 developed residential estate lots located in
southwest Austin within the Barton Creek community and 436 acres
of undeveloped residential, multi-family and commercial property
and one substantially complete 75,000-square-foot office building
located south of and adjacent to the Barton Creek community in an
area known as the Lantana project. Our remaining Austin acreage
consists of about 1,300 acres of undeveloped commercial and multi-
family property within the Circle C community, also located in
southwest Austin.
We also own 13 acres of undeveloped commercial property in
Houston, Texas, which we expect to sell in 2002 and 21 acres of
undeveloped multi-family property located in San Antonio, Texas,
which is actively being marketed.
In February 2002, as a result of completing certain
transactions with Olympus (see "Transactions with Olympus Real
Estate Corporation" below and Note 11), we acquired an
additional 22 developed residential lots, including 21 lots that
average over 3 acres each in size, in the Barton Creek
community. We also acquired a 140,000-square-foot office
complex, that consists of two office buildings located in Austin,
Texas that are currently leased at more than 95 percent of their
capacity.
COMPANY STRATEGIES
Since our formation in 1992, our primary objectives have been
to reduce our indebtedness and increase our financial flexibility.
Accordingly, we had reduced our debt to $8.4 million at December
31, 2000 from $493.3 million in March 1992. As a result of the
settlement of certain development related lawsuits (see Note 9)
and to an increasing level of cooperation between the City of
Austin (the City) and us, we substantially increased our development
activities during 2001 (see below), which has resulted in our debt
increasing to $25.6 million at December 31, 2001. Our debt increased
to $46.9 million immediately following our transactions with Olympus
in February 2002 (see "Transactions with Olympus Real Estate
Corporation" below). We have been able to fund our development
activities and our transactions with Olympus primarily through our
expanded credit facility (see "Credit Facility" below and Note 5),
which was established as a result of the positive financing
relationship we have built with Comerica Bank-Texas over the past
several years. This newly expanded credit facility, together
with other sources of financing, has increased our financial
flexibility, allowing us to fully concentrate our efforts on
developing our properties and increasing shareholder value. Key
factors in accomplishing these goals include:
* Our overall strategy is to enhance the value of our Austin
properties by securing and maintaining development entitlements
and developing and building real estate projects for sale or
investment, thereby increasing the potential return from our core
assets. In recent years, we had significant joint venture
development activity (see below).
During 1999, we completed the development of the 75
residential lots at the Wimberly Lane subdivision at Barton
Creek and by the end of 2000, 72 of the lots had been sold.
We sold two additional Wimberly Lane lots during 2001. Also
during 1999, we completed and leased the first 70,000-square
foot-office building at the 140,000-square-foot Lantana
Corporate Center. Construction and leasing of the second
70,000-square-foot office building was completed during the
third quarter of 2000. We are continuing to develop several
new subdivisions around the new Tom Fazio designed "Fazio
Canyons" golf course, which included the construction of 54
multi-acre residential lots during the first half of 2000 at
the Escala Drive subdivision at Barton Creek. We sold
32 of the Escala Drive lots during 2000. We sold
one Escala Drive lot during 2001. In February 2002, in
connection with certain transactions with Olympus (see
"Transactions with Olympus Real Estate Corporation" below) we
acquired the remaining residential lots in the Wimberly Lane
and Escala Drive subdivisions, as well as the two office
buildings at Lantana.
* Significant progress has been made in our obtaining the
permitting necessary for additional Austin-area property
development.
1
We have reached agreement with the City concerning
development of a 417-acre portion of the Lantana project. The
agreement reflects a cooperative effort between the City and
us to allow development based on grandfathered entitlements,
while adhering to stringent water quality standards and other
enhancements to protect the environment (Note 9). With this
most recent agreement, we have now completed the core entitlement
process for the entire Lantana project allowing for approximately
2.9 million square feet of office and retail development,
approximately 400 multi-family units (previously sold to an
unrelated third party, see below) and approximately 330 residential
lots.
In the fourth quarter of 2000, we received final subdivision
plat approval from the City to develop approximately 170 acres
of commercial and multi-family real estate within our Lantana
project. The required infrastructure development at the site,
known as "Rialto Drive," was completed during the fourth
quarter of 2001. Construction of the first of two 75,000-
square-foot office buildings at Rialto Drive (7500 Rialto) is
substantially complete. Full development of the 170 acres is
expected to consist of over 800,000 square feet of office and
retail space and 400 multi-family units, which are now being
constructed by an apartment developer pursuant to our sale of
a 36.4-acre multi-family tract in December 2000 (see "Results of
Operations" located in Items 7.and 7A. elsewhere in this Annual
Report on Form 10-K).
We continue to work on residential development plans for
portions of our Circle C project. We have been meeting with
City representatives and with neighborhood and environmental
groups to discuss a plan to modify portions of the land plan
and provide enhanced water quality protection for portions of
the Circle C project. During the fourth quarter of 2001, we
received U.S. Fish and Wildlife Service approval for our plan,
and City Zoning and Planning Commission approval for a 554-
acre planned unit development (PUD) containing 860 residential
units. City Council action on the PUD is expected during
2002.
We commenced construction of a new subdivision within the
Barton Creek community during the fourth quarter of 2000.
This subdivision, Mirador, is now complete and marketing
efforts have commenced. Mirador adjoins the Escala Drive
subdivision, which was previously owned by the Barton Creek
Joint Venture (see "Transactions with Olympus Real Estate
Corporation" below). The Mirador subdivision consists of 34
estate lots, averaging approximately 3.5 acres in size.
During the fourth quarter of 2001, we completed the
permitting for a 114-acre tract within the Barton Creek
community. The plat provides for 54 lots ranging in size from
one-third acre to multi-acre lots, some of which overlook the
Lost Creek Country Club golf course. We are also continuing
our efforts to secure final permitting for a 212-acre tract
within the Barton Creek community, which will include 125
single-family lots and nine acres for condominium development.
Some of these single-family lots will adjoin the Fazio Canyons
golf course. A 19-acre portion of the tract consisting of 66
planned villa units and a fire station received final plat
approval in early January 2002. Development of this area is
expected to commence by April 2002. Development of the
remaining Barton Creek property will be deferred until the
Austin-area economy improves (see "Risk Factors" below and
"Capital Resources and Liquidity" located in Items 7 and 7A.
elsewhere in this Annual Report on Form 10-K).
* We believe that we have the right to receive over $30
million of future reimbursements associated with previously
incurred Barton Creek utility infrastructure development costs.
At December 31, 2001, we had approximately $14 million of these
expected future reimbursements recorded as a component of "Real
estate and facilities" on our balance sheet. The remaining
reimbursements are not recorded on our balance sheet because they
relate to properties previously sold or represent a component of the
$115 million impairment charge we recorded in 1994. Additionally,
substantial additional costs eligible for reimbursement will be
incurred in the future as our development activities at Barton Creek
continue. We received a total of $7.1 million of Circle C
Municipal Utility District (MUD) reimbursements during 2000 (in
addition to the $10.3 million received during 1999) in full and
final settlement of our remaining Circle C infrastructure claim
against the City (Note 9). In connection with our February 2002
acquisition of certain Barton Creek properties we previously
jointly owned with Olympus, we obtained the right to receive
approximately $2 million of additional Barton Creek
reimbursables.
* We will continue to vigorously defend our rights to the
development entitlements of all our properties, but aggressive
attempts by certain parties to restrict growth in the area of our
holdings have had and may continue to have a negative effect on
near term development and sales activities.
* We are expanding our real estate management activities and
have been retained by third parties to provide management and
development assistance on selective real estate projects,
including the Lakeway project, near Austin (see below).
2
In January 2001, we entered into an expanded development
management agreement with Commercial Lakeway Limited
Partnership covering a 552-acre portion of the Lakeway
development known as Schramm Ranch, and we contributed $2.0
million as an investment in this project. Under the
agreement, we receive enhanced management and development fees
and sales commissions, as well as a net profits interest in
the project. Lakeway project distributions are made to us as
sales installments close. We are currently receiving a 28
percent share of any Lakeway project distributions and that
rate will continue until we receive proceeds totaling our
initial investment in the project ($2.0 million) plus a
stated annual rate of return, at which time, our share of the
Lakeway project distributions will increase to 40 percent.
During the second quarter of 2001, we negotiated an agreement
to sell the entire Schramm Ranch property to a single
purchaser for $11.0 million, conditioned on obtaining certain
entitlements. During 2001, we secured all the entitlements
necessary for the future development of the Schramm Ranch
property and the purchaser has closed and funded $5.0 million
representing two of the four planned sales installments for the
project. In connection with the second sale installment, which
occurred in December 2001, the Lakeway project distributed
approximately $1.2 million to us. We expect the remaining two
Schramm Ranch sales installments (totaling $6.0 million) will
occur in March 2002 and June 2002 and we expect to receive
approximately $2 million in future cash distributions from the
Lakeway project.
* We also continue to investigate and pursue opportunities for
new projects that would require minimal capital from us yet offer
the possibility of acceptable returns and limited risk.
However, until the Austin real estate market improves, our
available cash flow and cash flow requirements may preclude any
near-term expansion.
CREDIT FACILITY
We have established a solid banking relationship with
Comerica Bank-Texas that has substantially enhanced our financial
flexibility. Since December 1999, we have had a minimum of $30
million of borrowing availability under a credit facility
agreement with Comerica, subject to certain conditions. The
credit facility has subsequently been amended twice, with each
amendment reducing restrictions for borrowing under the facility.
The most recent credit facility amendment was finalized in
December 2001. Currently, the terms of the credit facility
provide for a $25 million revolving credit facility and a $5
million loan designed to provide funding for certain development
costs. These development costs already have been incurred and
the related development loan proceeds are available for borrowing
at our discretion. At December 31, 2001, we had borrowed $12.1
million under the revolving credit facility but had not borrowed
any amounts under the development loan facility. The credit
facility with Comerica will mature in April 2004. We had $13.5
million of additional long-term debt at December 31, 2001
representing borrowings associated with two $5 million unsecured
term loans and $3.5 million of borrowings on a $9.2 million
project loan facility for the 7500 Rialto Drive office building
project (see "Company Strategies" above). In February 2002, we
borrowed an additional $7.4 million under our revolving credit
facility to fund certain transactions with Olympus Real Estate
Corporation (Olympus). In connection with these transactions, we
assumed $12.9 million of debt associated with the construction of
two office buildings that we previously jointly owned with
Olympus (see "Transactions with Olympus Real Estate Corporation"
below). For a further discussion of the credit facility and our
other long-term financing arrangements, see Note 5 and "Capital
Resources and Liquidity" located in Items 7. and 7A. elsewhere in
this Annual Report on Form 10-K.
TRANSACTIONS WITH OLYMPUS REAL ESTATE CORPORATION
On May 22, 1998, we formed a strategic alliance with Olympus
to develop certain of our existing properties and to pursue new
real estate acquisition and development opportunities. Under the
terms of the agreement, Olympus purchased $10 million of our
mandatorily redeemable preferred stock, provided us a $10 million
convertible debt facility and agreed to make available up to $50
million of additional capital representing its share of direct
investments in joint Stratus/Olympus projects.
We subsequently entered into three joint ventures with
Olympus, in which we owned approximately 49.9 percent of each
joint venture and Olympus owned the remaining 50.1 percent. We
also served as the developer and manager for each of the joint
venture projects. Accordingly, in addition to partnership
distributions, we received various development fees, sales
commissions and other management fees for our services.
The first two joint ventures were formed on September 30,
1998. The first provided for the development of a 75 residential
lot project at the Barton Creek Wimberly Lane subdivision. We
sold the land to the joint venture for approximately $3.2 million
and paid approximately $0.5 million for our equity interest. The
other transaction involved approximately 700 developed lots and
80 acres of platted but undeveloped real estate at the Walden on
Lake Houston project, which Olympus purchased in April 1998 and
we managed since Olympus' acquisition through February 2002 (see
below). We acquired our interest in the related partnership
utilizing $2.0 million of funds available under the Olympus
convertible debt facility. During the third quarter of 1999, we
formed a third joint venture associated with the construction of
the first 70,000-square-foot office building at the Lantana
Corporate Center (7000 West). In this transaction, we sold 5.5
acres of commercial real estate to the joint venture for $1.0
3
million. In December 1999, we sold 174 acres of our Barton Creek
residential property to the joint venture initially formed to
develop the lots at the Wimberly Lane subdivision (see above) for
$11.0 million. The land was developed into 54 multi-acre single-
family residential lots, which are the largest lots developed to
date within the Barton Creek community. In the first quarter of
2000, we sold an additional 5.5 acres of commercial real estate
to 7000 West for $1.1 million. Construction of the second 70,000
square foot office building was completed in the third quarter of
2000. For a detailed discussion of these transactions see "Joint
Ventures with Olympus Real Estate Corporation" located in Items 7.
and 7A. and Note 4 located elsewhere in this Annual Report on
Form 10-K.
We repaid all our borrowings on the convertible debt
facility during the second quarter of 2001, and terminated the
facility on August 15, 2001 (Note 2). In February 2002 we
concluded our business relationship with Olympus, completing the
following transactions:
* We purchased our $10.0 million of mandatorily redeemable
preferred stock held by Olympus for $7.6 million.
* We acquired Olympus' ownership interest in the Barton Creek
Joint Venture for $2.4 million.
* We acquired Olympus' ownership interest in the 7000 West
Joint Venture for $1.5 million. In connection with this
acquisition, we have assumed the debt outstanding for 7000 West,
which at December 31, 2001 totaled $12.9 million. Related
amounts outstanding will be included in our consolidated balance
sheet commencing in the first quarter of 2002.
* We sold our ownership interest in the Walden Partnership to
Olympus for $3.1 million.
We funded the $7.4 million net cash cost for these
transactions, which is net of the approximate $1.0 million of cash
we received by acquiring the Barton Creek and 7000 West Joint
Ventures, through borrowings available to us under our $25 million
revolving credit facility agreement (see above, "Capital Resources
and Liquidity" within Items 7. and 7A. and Note 5 located elsewhere
in this Annual Report on Form 10-K.) At February 28, 2002, our long-
term debt totaled $46.9 million, including the $12.9 million of
debt we assumed in connection with the 7000 West acquisition. Our
remaining availability under our credit facility totaled
approximately $8.0 million at February 28, 2002.
For a detailed discussion of our Olympus transactions see
"Joint Ventures with Olympus Real Estate Corporation" and "Olympus
Relationship" located within Items 7. and 7A. and Notes 2, 3, 4 and
10 located elsewhere in this Annual Report on Form 10-K.
REGULATION AND ENVIRONMENTAL MATTERS
Our real estate investments are subject to extensive local,
city, county and state rules and regulations regarding
permitting, zoning, subdivision, utilities and water quality as
well as federal rules and regulations regarding air and water
quality and protection of endangered species and their habitats.
Such regulation has delayed and may continue to delay development
of our properties and result in higher developmental and
administrative costs.
We are making, and will continue to make, expenditures for
the protection of the environment with respect to our real estate
development activities. Emphasis on environmental matters will
result in additional costs in the future. Based on an analysis of
our operations in relation to current and presently anticipated
environmental requirements, we currently do not anticipate that
these costs will have a material adverse effect on our future
operations or financial condition.
EMPLOYEES
We currently have 26 employees, who manage our operations.
We also contract personnel to perform certain management and
administrative services, including administrative, accounting,
financial, tax, and other services, under a management services
agreement. We may terminate this contract at any time upon 90
days notice. These services are provided on a cost reimbursement
basis and totaled $0.4 million in 2001, $1.0 million in 2000
and $0.9 million in 1999.
RISK FACTORS
This report includes "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section
21E of the Securities Exchange Act of 1934. Forward-looking
statements are all statements other than statements of historical
fact included in this report, including, without limitation, the
statements under the headings "Business," "Properties," "Market
for Registrant's Common Equity and Related Stockholder Matters,"
and "Management's Discussion and Analysis of Financial Condition
and Results of Operations and Disclosures About Market Risks"
regarding our financial position and liquidity, payment of
dividends, strategic plans, future financing plans, development
and capital expenditures, business strategies, and our other
plans and objectives for future operations and activities.
4
Forward-looking statements are based on our assumptions and
analysis made in light of our experience and perception of
historical trends, current conditions, expected future
developments and other factors that we believe are appropriate
under the circumstances. These statements are subject to a
number of assumptions, risks and uncertainties, including the
risk factors discussed below and in our other filings with the
Securities and Exchange Commission, general economic and business
conditions, the business opportunities that may be presented to
and pursued by us, changes in laws or regulations and other
factors, many of which are beyond our control. Readers are
cautioned that forward-looking statements are not guarantees of
future performance, and the actual results or developments may
differ materially from those projected, predicted or assumed in
the forward-looking statements. Important factors that could
cause actual results to differ materially from our expectations
include, among others, the following:
IF WE ARE UNABLE TO GENERATE SUFFICIENT CASH FROM OPERATIONS, WE
MAY FIND IT NECESSARY TO CURTAIL OUR DEVELOPMENT OPERATIONS. We
have made substantial reductions in debt since our formation in
1992. However, significant capital resources will be required to
fund our development expenditures. Our performance continues to
be dependent on future cash flows from real estate sales, and
there can be no assurance that we will generate sufficient cash
flow or otherwise obtain sufficient funds to meet the expected
development plans for our properties.
Our real estate operations are also dependent upon the
availability and cost of mortgage financing for potential
customers, to the extent they finance their purchases, and for
buyers of the potential customers' existing residences.
OUR RESULTS OF OPERATIONS AND FINANCIAL CONDITION ARE GREATLY
AFFECTED BY THE PERFORMANCE OF THE REAL ESTATE INDUSTRY. Our
real estate activities are subject to numerous factors beyond our
control, including local real estate market conditions (both
where our properties are located and in areas where our potential
customers reside), substantial existing and potential
competition, general national, regional and local economic
conditions, fluctuations in interest rates and mortgage
availability and changes in demographic conditions. Real estate
markets have historically been subject to strong periodic cycles
driven by numerous factors beyond the control of market
participants.
Real estate investments often cannot easily be converted
into cash and market values may be adversely affected by these
economic circumstances, market fundamentals, competition and
demographic conditions. Because of the effect these factors have
on real estate values, it is difficult to predict with certainty
the level of future sales or sales prices that will be realized
for individual assets.
OUR OPERATIONS ARE SUBJECT TO AN INTENSIVE REGULATORY APPROVAL
PROCESS. Before we can develop a property we must obtain a
variety of approvals from local and state governments with
respect to such matters as zoning, density, parking, subdivision,
site planning and environmental issues. Certain of these
approvals are discretionary by nature. Because certain government
agencies and special interest groups have expressed concerns
about our development plans in or near Austin, our ability to
develop these properties and realize future income from our
properties could be delayed, reduced, prevented or made more
expensive.
Certain special interest groups have long opposed certain of
our plans in the Austin area and have taken various actions to
partially or completely restrict development in certain areas,
including areas where some of our most valuable properties are
located. We are actively opposing these actions. We currently
do not believe unfavorable rulings would have a significant long-
term adverse effect on the overall value of our property
holdings. However, because of the regulatory environment that
exists in the Austin area and the intensive opposition of certain
interest groups, there can be no assurance that such expectations
will prove correct.
OUR OPERATIONS ARE SUBJECT TO GOVERNMENTAL ENVIRONMENTAL
REGULATION, WHICH CAN CHANGE AT ANY TIME AND GENERALLY WOULD
RESULT IN AN INCREASE TO OUR COSTS. Real estate development is
subject to state and federal regulations and to possible
interruption or termination because of environmental
considerations, including, without limitation, air and water
quality and protection of endangered species and their habitats.
Certain of the Barton Creek properties include nesting
territories for the Golden Cheek Warbler, a federally listed
endangered species. In February 1995, we received a permit from
the U.S. Wildlife Service pursuant to the Endangered Species Act,
which to date has allowed the development of the Barton Creek and
Lantana properties free of restrictions under the Endangered
Species Act related to the maintenance of habitat for the Golden
Cheek Warbler.
Additionally, in April 1997, the U.S. Department of Interior
listed the Barton Springs Salamander as an endangered species
after a federal court overturned a March 1997 decision by the
Department of Interior not to list the Barton Springs Salamander
based on a conservation agreement between the State of Texas and
federal agencies. The listing of the Barton Springs Salamander
has not affected, nor do we anticipate it will affect, our Barton
Creek and Lantana properties for several reasons, including the
results of technical studies and our U.S.
5
Fish and Wildlife Service 10(a) permit obtained in 1995. Our
Circle C properties may, however, be affected, although the extent
of any impact cannot be determined at this time. Special interest
groups provided written notice of their intention to challenge our
10(a) permit and compliance with water quality regulations, but no
challenge has yet occurred.
We are making, and will continue to make, expenditures with
respect to our real estate development for the protection of the
environment. Emphasis on environmental matters will result in
additional costs in the future.
THE REAL ESTATE BUSINESS IS VERY COMPETITIVE AND MANY OF OUR
COMPETITORS ARE LARGER AND FINANCIALLY STONGER THAN WE ARE. The
real estate business is highly competitive. We compete with a
large number of companies and individuals, and many of them have
significantly greater financial and other resources than we have.
Our competitors include local developers who are committed
primarily to particular markets and also national developers
who acquire properties throughout the United States.
WE ARE VULNERABLE TO RISKS BECAUSE OUR OPERATIONS ARE CURRENTLY
EXCLUSIVE TO THE TEXAS MARKET. Our real estate activities are
located entirely in the Austin, Houston and San Antonio, Texas,
areas. Because of our geographic concentration and limited
number of projects, our operations are more vulnerable to local
economic downturns and adverse project-specific risks than those
of larger, more diversified companies.
The performance of the Texas economy and more specifically
the Austin economy, affects our sales and consequently the
underlying values of our properties. While the Texas economy
has remained healthy in recent years, its economy has
historically been subject to cyclical downturns primarily as a
result of adverse economic conditions within the oil and gas
industry. The Austin economy is heavily influenced by conditions
in the technology industry. As the technology market weakens, as
is the current condition, we experience reduced sales, primarily
affecting our "high-end" properties, which can significantly
affect our financial condition and results of operations.
Our operations are subject to natural risks. Our performance may
be adversely affected by weather conditions that delay
development or damage property.
ITEM 2. PROPERTIES
- ------------------
Our acreage to be developed as of December 31, 2001, excluding
our holdings in joint ventures, is provided in the following table.
The acreage to be developed is broken down into anticipated uses for
single-family lots, multi-family units and commercial development
based upon our understanding of the properties' existing entitlements.
However, there is no assurance that the undeveloped acreage will
be so developed because of the nature of the approval and
development process and market demand for a particular use
Potential Development Acreage
---------------------------------------------
Developed Single Multi-
Lots Family Family Commercial Total
--------- ------ ------- ---------- -------
Austin
Barton Creek 34 1,117 249 673 2,039
Lantana - 154 - 282 436
Circle C - - 212 1,065 1,277
Houston
Copper Lakes - - - 13 13
San Antonio
Camino Real - - 21 - 21
--------- ------ ------- ---------- -------
Total 34 1,272 482 2,032 3,786
========= ====== ======= ========== =======
The table does not include the properties acquired in the
transactions with Olympus (see "Transaction with Olympus Real
Estate Corporation" above, "Capital Resources and Liquidity"
located in Items 7. and 7A. and Note 11 located elsewhere in
this Annual Report on Form 10-K). In connection with the
transactions, we acquired 22 developed residential lots in the
Barton Creek community and a 140,000-square-foot office complex
in Lantana that consists of two buildings that are leased in
excess of 95 percent.
6
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
Various regulatory matters and litigation involving the
development of our Austin properties are summarized below.
Joint Venture Suits: Stratus ABC West I, L.P. v. Oly ABC West I,
L.P. Cause No. GN-104206 (126th Judicial Court of Travis County,
Texas filed December 26, 2001); Stratus Ventures I Walden, L.P.
v. Oly/Houston Walden, L.P. Cause No. GN-104207 (200th Judical
District Court of Travis County, Texas, filed December 26, 2001);
Stratus 7000 West, Ltd. v. Oly Lantana, L.P. Cause No. GN-104208
(201st Judicial District Court of Travis County, Texas, filed
December 26, 2001); Oly ABC West I, L.P., Oly/Houston Walden,
L.P., Oly Lantana, L.P. v. Stratus ABC West I, L.P., Stratus
Ventures I Walden L.P., Stratus 7000 West, Ltd. (191st District
Court of Dallas County, Texas, filed December 26, 2001). In
November 2001, Olympus Real Estate Corporation notified Stratus
that it was exercising the "buy/sell" provisions contained within
the three separate joint venture partnership agreements. Olympus
offered to either sell Stratus its interest in the each of the
three joint ventures or otherwise purchase Stratus' interests in
each of the joint ventures. In December 2001, Stratus notified
Olympus of its election to purchase Olympus' interests in each of
the three joint ventures. A dispute arose over the calculation of
the purchase price for each joint venture interest and both Stratus
and Olympus filed suits. Stratus and Olympus subsequently settled
out of court and closed on multiple transactions in February 2002
that mutually concluded the business relationship between Stratus
and Olympus (see "Transactions with Olympus Real Estate Corporation,"
included in Items 1., 7. and 7A. and Note 11 located elsewhere in this
Annual Report on Form 10-K). These cases have been dismissed with
prejudice.
Although we are no longer involved in any material
litigation, we may from time to time be involved in various legal
proceedings of a character normally incident to the ordinary
course of our business. We believe that potential liability from
any of these pending or threatened proceedings will not have a
material adverse effect on our financial condition or results of
operations. We maintain liability insurance to cover some, but
not all, potential liabilities normally incident to the ordinary
course of our business as well as other insurance coverage
customary in our business, with such coverage limits as
management deems prudent.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
Not applicable.
EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------
Certain information, as of March 14, 2002, regarding our
executive officers is set forth in the following table and
accompanying text.
Name Age Position or Office
------------------------ ---- -----------------------
William H. Armstrong III 37 Chairman of the Board,
President and
Chief Executive Officer
Kenneth N. Jones 42 General Counsel
John E. Baker 56 Senior Vice President -
Accounting
Mr. Armstrong has been employed by us since our inception in
1992. He has served us as Chairman of the Board since August
1998, Chief Executive Officer since May 1998 and President since
August 1996. Previously Mr. Armstrong served as Chief Operating
Officer from August 1996 to May 1998 and as Chief Financial
Officer from May 1996 to August 1996. He served as Executive
Vice President from August 1995 to August 1996.
Mr. Jones has served as our General Counsel since August
1998. Mr. Jones is a partner with the law firm of Armbrust &
Brown, L.L.P. and he provides legal and business advisory
services under a consulting arrangement with his firm.
Mr. Baker has served as our Senior Vice President -
Accounting since May 2001. Previously, he served as our Vice
President - Accounting from August 1996 until May 2001.
7
PART II
ITEM 5. MARKET FOR REGISTRANTS'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
- ------------------------------------------------------------
Our common stock trades on Nasdaq under the symbol STRS.
The following table sets forth, for the periods indicated, the
range of high and low sales prices, as reported by Nasdaq. We
have restated the stock prices for all periods prior to May 2001
to reflect the effects of the stock split transaction (see Note 8).
7
2001 2000
----------------- ----------------
High Low High Low
------- ------- ------- ------
First Quarter $ 14.75 $ 10.00 $ 9.00 $ 7.00
Second Quarter 14.00 9.50 10.26 8.00
Third Quarter 11.50 9.00 10.00 8.26
Fourth Quarter 9.88 8.05 10.06 8.00
As of March 14, 2002 there were 1,117 holders of record of our
common stock. We have not in the past paid, and do not anticipate
in the future paying, cash dividends on our common stock. The
decision whether or not to pay dividends and in what amounts is
solely within the discretion of our Board of Directors. However,
our current ability to pay dividends is also restricted by terms
of our credit agreement, as discussed in Note 5
ITEM 6. SELECTED FINANCIAL DATA
- -------------------------------
The following table sets forth our selected historical
financial data for each of the five years in the period ended
December 31, 2001. The historical financial information is
derived from our audited financial statements and is not
necessarily indicative of our future results. You should read
the information in the table below together with Items 7. and 7A.
"Management's Discussion and Analysis of Financial Condition and
Results of Operations and Disclosures About Market Risks" and
Item 8. "Financial Statements and Supplemental Data."
2001 2000 1999 1998 1997
--------- --------- -------- -------- ---------
(In Thousands, Except Per Share Amounts)
Years Ended December 31:
Revenues $ 14,829 $ 10,099 $ 15,252 $ 18,535 $ 31,495
Operating income (loss) 2,794 (3,649) 2,006 (1,829) 2,556
Interest income 1,157 1,203 1,344 1,257 1,351
Equity in unconsolidated
affiliates'income(loss) 207 1,372 307 (26) -
Net income (loss) 3,940 14,222 a 2,871 (2,638) 7,006 b
Basic net income
(loss) per share c 0.55 1.99 0.40 (0.37) 0.98
Diluted net income
(loss) per share c 0.48 1.74 0.35 (0.37) 0.97
Basic average shares
outstanding c 7,142 7,148 7,144 7,144 7,144
Diluted average shares
outstanding c 8,204 d 8,351 d 8,114 d 7,144 7,259
At December 31:
Real estate and
facilities, net 110,042 93,005 91,664 96,556 105,274
Total assets 129,478 111,893 115,672 111,829 112,754
Long-term debt 25,576 8,440 16,562 29,178 37,118
Stockholders' equity 84,659 81,080 66,840 63,969 66,607
a. Includes $14.3 million ($1.71 per share) gain associated
with final settlement of our Circle C Municipal Utility District
claim against the City of Austin (see Note 96).
b. Includes a $4.5 million ($0.62 per share) gain from sale of
all remaining oil and gas property interests.
c. Reflects the effects of the stock split transactions
completed in May 2001 (see Note 8).
d. Assumes the redemption of our 1.7 million shares of
outstanding mandatorily redeemable preferred stock for 851,000
shares of our common stock.
ITEMS 7. AND 7A. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS AND DISCLOSURES ABOUT MARKET RISKS
- ----------------------------------------------------------------------
OVERVIEW
We are engaged in the acquisition, development, management
and sale of commercial and residential real estate properties. We
conduct real estate operations on properties we own and, until
February 2002, through unconsolidated affiliates we jointly
owned with Olympus Real Estate Corporation (Olympus) (see "Joint
Ventures with Olympus Real Estate Corporation" below), pursuant
to a strategic alliance formed in May 1998.
Our principal real estate holdings are currently in the
Austin, Texas, area. Our most significant holdings include 2,039
acres of undeveloped residential, multi-family and commercial
property and 34 developed residential
8
estate lots located in
southwest Austin within the Barton Creek community and 436 acres
of undeveloped residential, multi-family and commercial property
and one substantially complete 75,000-square-foot office
building, located south of and adjacent to the Barton Creek
community in an area known as the Lantana project. Our remaining
Austin acreage consists of about 1,300 acres of undeveloped
commercial and multi-family property within the Circle C
community, also located in southwest Austin.
We also own 13 acres of undeveloped commercial property in
Houston, Texas, which we expect to sell in 2002, and 21 acres of
undeveloped multi-family property located in San Antonio, Texas,
which are being actively marketed. In February 2002, in
connection with transactions that concluded our business
relationship with Olympus (see "Capital Resources and Liquidity"
below and Note 11) we acquired 22 additional residential lots
within the Barton Creek community and a 140,000-square-foot
office complex within the Lantana project consisting of two
buildings that are more than 95 percent leased.
Our sales activities, excluding large undeveloped tract
sales (see "Results from Operations" below), declined
significantly during 2001 reflecting the downturn in the
information technology sector, which has negatively affected
Austin's business climate. Because of this downturn, we are
deferring some of our remaining near-term development plans until
the real estate market improves. The weakness in the Austin
real estate market during 2001 primarily affected the results of
operations of our unconsolidated affiliates (see below).
JOINT VENTURES WITH OLYMPUS REAL ESTATE CORPORATION (OLYMPUS)
We entered into three joint ventures with Olympus subsequent
to a strategic alliance entered into in May 1998 (see Note 2).
All subsequent references to "Notes" refer to the Notes to
Financial Statements located in Item 8, found elsewhere in this
Annual Report on Form 10-K.
Olympus generally owned an approximate 50.1 percent interest
and we owned an approximate 49.9 percent interest in each joint
venture. The first two joint ventures were formed on September
30, 1998 and the third was formed in the third quarter of 1999.
Subsequently, two of the joint ventures were expanded to
encompass new projects. See Note 4 for financial information,
including condensed income statement and balance sheet data,
about our unconsolidated affiliates.
In February 2002, we purchased Olympus' ownership interests
in the two Austin joint ventures and agreed to sell our interest
in the Houston joint venture (see below). These transactions
concluded our business relationship with Olympus (see "Capital
Resources and Liquidity," Item 1. "Transactions with Olympus
Real Estate Corporation," Item 3. "Legal Proceedings," and Note 11).
Barton Creek Joint Venture
- --------------------------
The first joint venture involved our sale of the Wimberly
Lane tract within the Barton Creek community near Austin, Texas,
to the Oly Stratus Barton Creek I Joint Venture (Barton Creek
Joint Venture) on September 30, 1998. The Barton Creek Joint
Venture agreed to pay $3.3 million for the 28-acre tract. We
received $2.1 million, a note for $1.2 million and made an equity
contribution of $0.5 million upon formation of the joint venture.
In the transaction, we deferred $1.6 million of revenues and $0.6
million of related gain associated with our 49.99 percent
ownership interest in the joint venture. As manager of the
project, we secured a $3.9 million project loan facility for the
joint venture. The initial proceeds from this facility were used
to reimburse the $1.9 million of development costs that we
incurred on the project prior to the formation of the joint
venture. Subsequent borrowings on the facility were used to
complete the development of 75 residential lots at the "Wimberly
Lane" subdivision of Barton Creek. As developer, we completed 75
residential lots during the first quarter of 1999 and immediately
began marketing the lots. As manager, we sold 42 of the
Wimberly Lane lots during 1999 for $4.8 million, which enabled
the joint venture to repay all the borrowings outstanding under
the project loan facility and to partially fund the development
of 54 additional lots in the "Escala Drive" subdivision of the
Barton Creek Joint Venture (see below). We sold 30 additional
Wimberly Lane residential lots during 2000 for $3.5 million. We
sold two Wimberly Lane lots during 2001 for $0.2 million and we
currently have one lot remaining for sale in the subdivision.
In December 1999, we sold the Barton Creek Joint Venture 174
acres of land encompassing 54 platted lots, within the "Escala
Drive" subdivision of the Barton Creek community. Upon closing
of the sale, we received $6.0 million and a $5.0 million note. We
deferred $5.5 million of the $11.0 million of sales proceeds and
$3.0 million of the $6.0 million related gain attributable to our
ownership interest. The 54 lots, completed during the first half
of 2000, were developed pursuant to the more restrictive
development requirements of the City of Austin (the City). Each
lot averages over three acres in size, which together with the
similar sized lots in the Mirador subdivision (see "Stratus
Development Activities" below), are among the largest lots
developed to date within the Barton Creek community. All of the
lots have scenic hill country settings and some overlook the
"Fazio Canyons" golf course. The development of these lots was
funded through the initial equity contributions of the partners
9
and proceeds from sales of lots at the Wimberly Lane subdivision
of the Barton Creek Joint Venture (see above). As manager, we
sold 32 Escala Drive lots for $14.0 million during 2000. We
sold one Escala Drive lot for $0.8 million in 2001. At December
31, 2001, there were 21 lots remaining to be sold at the Escala
Drive subdivision.
As manager of the Barton Creek Joint Venture, we receive
sales commissions and management fees for our services. We
earned fees totaling $0.1 million in 2001, $1.2 million in 2000
and $0.3 million in 1999 related to our Barton Creek Joint
Venture activities. We also received a development fee of $0.2
million in 2000 and $0.1 million in 1999 upon completing the
respective subdivisions.
The Barton Creek Joint Venture distributed approximately
$17.1 million to the partners through December 31, 2001. Our
share of these distributions, approximately $8.6 million, was
recorded as a reduction of the related Barton Creek Joint Venture
notes receivable ($6.2 million) and the related accrued interest
($0.7 million), with the remaining $1.7 million of distribution
proceeds representing a return of equity that reduced our
investment in the Barton Creek Joint Venture. Our investment in
the Barton Creek Joint Venture at December 31, 2001 was $3.6
million.
Walden Partnership
- ------------------
The second joint venture, also formed on September 30, 1998,
involved us acquiring a 49.9 percent interest in the Oly Walden
General Partnership (the Walden Partnership), which owns the
Walden on Lake Houston project in Houston, Texas, which Olympus
purchased in April 1998. We managed this project on Olympus'
behalf under the terms of a management agreement since April 1998
and received management fees and commissions for our services.
We paid $2.0 million for our share of the Walden Partnership,
borrowing funds available to us under the $10 million convertible
debt facility with Olympus (see Note 2). At December 31, 2001,
the Walden Partnership's remaining assets included 404 developed
lots and 80 acres undeveloped real estate. During the second
quarter of 1998, we negotiated agreements with homebuilders
providing for the sale of approximately 90 percent of the 930
developed lots at that time. These agreements require the
purchasers to close on the lots pursuant to a specific schedule
that extends through 2002. As of December 31, 2001, 522 lots
have closed and funded under these agreements. During 2001, the
Walden Partnership repaid the remaining $1.7 million outstanding
on its original $8.2 million non-recourse project loan
established on September 30, 1998. In connection with obtaining
the Walden Partnership loan, we were required to make an initial
restricted cash deposit of $2.5 million. At December 31, 2000,
the amount remaining in the restricted account totaled $0.6
million, all of which was released to us during 2001 as the loan
was repaid.
7000 West
- ---------
In August 1999, we sold Olympus a 50.1 percent interest in
the first 70,000-square-foot office building (Phase I) of the
planned 140,000-square-foot Lantana Corporate Center (7000 West).
Upon closing, we received $1.0 million and recognized a $0.4
million gain. We deferred our retained interest of the sales proceeds
($0.5 million) and related gain ($0.4 million) associated with the
sale of the 5.5 acres of commercial real estate associated with Phase I
of the project. As developer, we completed construction on Phase I in
November 1999, and as manager, we secured third party lease agreements
that have fully occupied the building. During the first quarter of 2000,
we completed a transaction admitting Olympus as our joint venture partner
in the second 70,000-square-foot office building (Phase II) at 7000
West. In this transaction, we sold an additional 5.5 acres of
commercial real estate to the joint venture. Revenues from this
sale of $1.1 million and the related gain of $0.8 million were
deferred until construction and leasing of the building was
completed, which occurred during the third quarter of 2000. At
that time, we recognized Olympus' 50.1 percent ownership interest
in the revenues($0.5 million) and related gain ($0.4 million).
In connection with the completion of construction of the two office
buildings, we received development fees totaling $0.3 million in 2000
and $0.2 million in 1999. In our role as manager, we arranged for a
$6.6 million project loan for 7000 West, which was utilized to
construct Phase I. The construction of Phase II required
additional financing, which was provided when we arranged for an
additional $7.7 million of availability on the 7000 West
development loan. The variable rate, non-recourse loan is
secured by the 11 acres of land at 7000 West and both 70,000-
square-foot office buildings and is guaranteed by us. The loan
was scheduled to mature on August 24, 2001; however, as manager
we negotiated an extension of the term loan to August 24, 2002,
with an option to extend the maturity to August 24, 2003, subject
to certain conditions. The borrowings outstanding on this
development loan totaled $12.9 million at December 31, 2001 and
$12.0 million at December 31, 2000. As a result of our February
2002 acquisition of this office complex from Olympus (see
"Capital Resources and Liquidity," below and Note 11), we will
include this debt on our balance sheet in the future.
STRATUS' DEVELOPMENT ACTIVITIES
We have reached agreement with the City concerning
development of a 417-acre portion of the Lantana project. The
agreement reflects a cooperative effort between the City and us
to allow development based on grandfathered entitlements, while
adhering to stringent water quality standards and other
enhancements to protect the environment (Note 9). With this most
recent agreement, we have now completed the core entitlement
process for
10
the entire Lantana project allowing for approximately
2.9 million square feet of office and retail development,
approximately 400 multi-family units (previously sold to an
unrelated third party, see below), and approximately 330
residential lots.
In the fourth quarter of 2000 we received final subdivision
plat approval from the City to develop approximately 170 acres of
commercial and multi-family real estate within our Lantana
development. The required infrastructure development at the
site, known as "Rialto Drive," was completed during the fourth
quarter of 2001. Construction of the first of two 75,000-square
foot-office buildings at Rialto Drive (7500 Rialto) is
substantially complete. Funding for the construction of the
office buildings at Rialto is available to us under a new project
development loan (see "Capital Resources and Liquidity" below).
Full development of the 170 acres is expected to consist of over
800,000 square feet of office and retail space and 400 multi-
family units, which are now being constructed by an apartment
developer pursuant to our sale of a 36.4-acre multi-family tract
in December 2000 (see "Results of Operations" below).
We continue to work on residential development plans for
portions of our Circle C project. We have been meeting with City
representatives and with neighborhood and environmental groups to
discuss a plan to modify portions of the land plan and provide
enhanced water quality protection for the Circle C project.
During the fourth quarter of 2001, we received U.S. Fish and
Wildlife Service approval for our plan, and City Zoning and
Planning Commission approval for a 554-acre planned unit
development (PUD) containing 860 residential units. City Council
action on the PUD is expected during 2002.
We commenced construction of a new subdivision within the
Barton Creek community during the fourth quarter of 2000. This
subdivision, Mirador, is now complete and marketing efforts have
commenced. Mirador adjoins the Escala Drive subdivision, which
was previously owned by the Barton Creek Joint Venture (see
above). The Mirador subdivision consists of 34 estate lots,
averaging approximately 3.5 acres in size.
During the fourth quarter of 2001, we completed the
permitting for a 114-acre tract within the Barton Creek
community. The plat provides for 54 lots ranging in size from one-
third acre to multi-acre lots, some of which overlook the Lost
Creek Country Club golf course. We are also continuing our
efforts to secure final permitting for a 212-acre tract within
the Barton Creek community, which will include 125 single-family
lots and nine acres for condominium development. Some of these
single-family lots will adjoin the Fazio Canyons golf course. A
19-acre portion of the tract consisting of 66 planned villa units
and a fire station received final plat approval in early January
2002. Development of this area is expected to commence by April
2002. Development of the remaining Barton Creek property will be
deferred until the Austin-area economy improves (see "Capital
Resources and Liquidity" below).
RESULTS OF OPERATIONS
We are continually evaluating the development potential of
our properties and will continue to consider opportunities to
enter into significant transactions involving our properties. As
a result, and because of numerous other factors affecting our
business activities as described herein, our past operating
results are not necessarily indicative of our future results.
Summary operating results follow:
2001 2000 1999
-------- -------- --------
(In Thousands)
Revenues:
Undeveloped properties
Unrelated parties $ 9,623 $ 2,101 $ 3,279
Olympus - 533 6,020
Recognition of deferred revenues 3,792 4,026 904
-------- -------- --------
Total undeveloped properties 13,415 6,660 10,203
Developed properties - 709 3,692
Commissions, management fees and other 1,414 2,730 1,357
-------- -------- --------
Total revenues $ 14,829 $ 10,099 $ 15,252
======== ======== ========
Operating income (loss) $ 2,794 a $ (3,649)b $ 2,006 a,b
Net income 3,940 14,222 c 2,871
11
a. Includes reimbursement of infrastructure costs expensed in
prior years of $1.3 million in 2001 and $2.6 million in 1999.
There were no reimbursements of infrastructure costs in 2000
except for the Circle C reimbursement as discussed below.
b. Includes $0.4 million of recognized gain associated with the
7000 West (Phase II) transaction in 2000, $3.5 million of
recognized gains associated with transactions involving the 7000
West (Phase I) and Barton Creek Joint Ventures in 1999.
c. Includes $14.3 million of recognized gains associated with
the settlement of our Circle C infrastructure reimbursement claim
against the City (see "Non-Operating Results," and Note 9).
Our revenues during 2001 primarily reflect the sale of
undeveloped entitled properties to unrelated third parties.
During the third quarter of 2001, we sold a 41-acre undeveloped
tract in Austin, Texas, for $3.3 million. During the first half
of 2001 our undeveloped property revenues included the sale of
112 acres of undeveloped entitled residential property in
Houston, Texas, for $2.7 million, the sale of 10 acres of
undeveloped entitled multi-family property in Dallas, Texas, for
$1.7 million and one 17-acre undeveloped tract sale in Austin,
Texas totaling $2.0 million. In connection with our property
sale during the third quarter of 2001, we financed $2.3 million
of the sale by taking a long-term note from the purchaser. The
amount outstanding on this note totaled $2.2 million at December
31, 2001. We also financed $2.1 million of the undeveloped
residential property sale in Houston, of which $1.9 million was
outstanding at December 31, 2001. We currently anticipate these
notes will be fully collectible.
The majority of the deferred revenue recognized during
2001 was associated with the sale of a 36.4-acre multi-family
tract within the Rialto Drive project in December 2000. In this
transaction we sold the property for $5.3 million but deferred
recognition of $3.6 million of the related sale proceeds. We
recognized this deferred revenue pro rata as the required
infrastructure construction was completed. As discussed in
"Development Activities" above, we recognized the entire $3.6
million of deferred revenues during 2001 as construction at the
Rialto Drive project was completed. The remainder of our
deferred revenue recognition was associated with the sale of two
Escala Drive lots and one Wimberly Lane lot by the Barton Creek
Joint Venture.
Our undeveloped property revenues include both sales of
undeveloped real estate to unrelated parties and to our
previously unconsolidated affiliates (see "Joint Ventures with
Olympus Real Estate Corporation" above). When we sold real estate
to an entity owned jointly with Olympus, we deferred recognizing
revenue from the sale related to our ownership interest until
sales were made to unrelated parties. Our undeveloped properties
revenues for 2000 primarily reflect the recognition of previously
deferred revenues from the sale of undeveloped real estate to our
unconsolidated affiliates. We recognized $4.0 million of
previously deferred revenues as a result of sales of 30 Wimberly
Lane lots and 32 Escala Drive lots at the Barton Creek Joint
Venture. Our remaining undeveloped properties revenues include
the sale of one acre of multi-family property in San Antonio,
Texas, and the 36.4-acre multi-family Lantana tract in Austin,
which was sold in December 2000 for $5.3 million. Our sales to
Olympus included its 50.1 percent interest in the 5.5 acres of
commercial real estate sold to 7000 West for construction of the
second 70,000-square-foot building. We sold our 24 remaining
developed lots during 2000. We have subsequently added 34 estate
lots to our inventory with the completion of the Mirador
subdivision within the Barton Creek community during 2001 (see
"Stratus Development Activities" above).
Our 1999 undeveloped property revenues to unrelated parties
included (1) the sale of 44 acres of residential property in
Houston, (2) the sale of 34 acres of multi-family real estate in
San Antonio and (3) the sale of 8 acres of multi-family real
estate in Dallas. Sales of real estate to joint ventures with
Olympus included the sale of 174 acres of residential property to
the Barton Creek Joint Venture and the sale of 5.5 acres of
commercial real estate to 7000 West (see "Joint Ventures with
Olympus Real Estate Corporation" above). Our recognition of
deferred revenues resulted from the sale of 42 Wimberly Lane
developed lots by the Barton Creek Joint Venture. Sales of 75
single-family homesites represent our 1999 developed property
revenues.
Commissions, management fees and other income reflect our
efforts to expand our services to third parties over the past
three years. The decrease in this type of revenue during 2001
primarily reflects the substantial decrease in sales by our
unconsolidated joint ventures, particularly the Barton Creek
Joint Venture. The substantial revenues during 2000 primarily
reflect our increased sales commissions from the Barton Creek
Joint Venture. We sold lots at both the Escala Drive and
Wimberly Lane subdivisions during 2000 and we sold the initial
Wimberly Lane lots during 1999. Our management fee revenue for
the past three years also includes fees associated with our
management of the 2,200-acre Lakeway project near Austin.
Costs of sales were $9.1 million in 2001, $10.0 million in
2000 and $9.7 million in 1999. The decrease in 2001 from 2000
primarily reflects the reduced recognition of previously deferred
costs related to the sales of land to the Barton Creek Joint
Venture, which totaled $0.1 million in 2001, $1.9 million in 2000
and $0.6 million in 1999. Our remaining cost of sales during
2001 reflected the costs associated with the undeveloped
properties sold
12
throughout the year. The increase between the
amount of deferred costs recognized during 2000 and those
recognized during 1999 was partially offset by a reduction in
sales, particularly those related to the sales of developed lots.
Our general and administrative expenses totaled $2.9 million
in 2001, $3.7 million in 2000 and $3.5 million in 1999. The
substantial decrease in our general and administrative costs
during 2001 reflects our implementation of a new information
system and other initiatives to reduce costs, especially during
2001 as sales activity declined. Legal expenses totaled $0.5
million in 2001, $0.5 million in 2000 and $0.8 million in 1999.
Legal costs decreased in 2000 as a result of our resolving our
Circle C disputes with the City (see "Non-Operating Results" and
"Capital Resources and Liquidity" below).
Non-Operating Results
- ---------------------
Interest expense, net of capitalized interest, totaled $0.5
million in 2001, $1.3 million in 2000 and $0.8 million in 1999
(see Note 5). Capitalized interest totaled $1.4 million in 2001,
$1.3 million in 2000 and $1.2 million in 1999.
In March 2000, the City approved a settlement agreement
involving disputes between the City and other Austin-area real
estate developers and landowners concerning the Circle C
community. Under terms of this settlement, the lawsuits
contesting the City's December 1997 annexation of all land within
the four Circle C Municipal Utility Districts (MUD) and the
dissolution of the four MUDs have been dismissed with prejudice.
Accordingly, the City's cumulative partial payments of our Circle
C MUD reimbursement claim, totaling $10.5 million, were no longer
subject to a repayment contingency and we recorded approximately
$7.4 million of these previously deferred proceeds in other
income during the first quarter of 2000. This amount represents
that portion of the reimbursed infrastructure expenditures in
excess of our remaining basis in these assets, as well as related
interest income on the reimbursements. The remaining $3.1 million
was recorded as a reduction of our investment in Circle C. In
December 2000, we received an additional $6.9 million, including
$0.6 million of interest, from the City as full and final
settlement of the City's obligations in this matter. We recorded
the proceeds as a gain during the fourth quarter of 2000 (Note 9).
We previously accrued liabilities totaling $5.1 million in
connection with the previous operation of certain oil and gas
properties that were sold during 1993. During 2000, management
completed a review of these amounts and determined that
conditions in effect at the time warranted reversal of $2.1
million of these accruals. Accordingly, other income of $2.1
million is reflected in the Statement of Income for the year
ended December 31, 2000. The remaining liability represents our
indemnification of the purchaser for any future abandonment costs
in excess of net revenues received by the purchaser in connection
with the sale of one oil and gas property in 1993. We accrued
$3.0 million relating to this liability at the time of the
purchase, which is included in "Other liabilities" in
the accompanying balance sheet. We periodically assesses the
reasonableness of amounts recorded for this liability through the
use of information provided by the owner of the property,
including its net production revenues. The carrying value of this
liability may be adjusted or eliminated, as additional
information becomes available. Future changes in the estimates
of this liability will be reflected in our earnings.
CAPITAL RESOURCES AND LIQUIDITY
Comparison Of Year-To-Year Cash Flows
- -------------------------------------
Net cash provided by operating activities totaled $3.2
million in 2001, $17.9 million in 2000 and $20.6 million in
1999. The decrease in 2001 compared with 2000 primarily reflects
the receipt of certain Circle C reimbursement proceeds (see
below) during 2000 and a reduction in distributions received from
the Barton Creek Joint Venture, including the receipt of proceeds
totaling $6.5 million on their outstanding notes payable to us in
2000. The decrease was offset in part by our increased revenues
from sales of undeveloped properties during the third quarter of
2001 and the Lakeway distribution during the fourth quarter of
2001 (see below). The decrease in 2000 compared with 1999
reflects receipt of $7.1 million from the City in settlement of
our Circle C infrastructure reimbursement claim in 2000 compared
with the $10.3 million we received from the City as partial
settlement of our claim during 1999 (see below and Item 3. "Legal
Proceedings"). The decrease also reflects our reduced sales
activity during 2000. The 2000 decrease was partially offset by
receipt of aforementioned Barton Creek Joint Venture proceeds in
fulfillment of the joint venture's remaining obligations to us
under terms of its initial land purchases in 1999 and 1998 (see
"Joint Ventures with Olympus Real Estate Corporation" above).
During 2000, we also received income distributions from our
unconsolidated affiliates totaling $1.4 million, which represents
a partial return on our equity in the earnings of our previously
unconsolidated affiliates.
Net cash used in investing activities totaled $24.3 million
in 2001, $5.4 million in 2000 and $8.9 million in 1999.
Investing activities for all three years reflect real estate and
facilities capital expenditure payments, net of any related
capitalized MUD reimbursements. Real estate and facility capital
expenditures were moderate during 1999 and 2000, reflecting the
constraints on our development activities resulting from disputes
with the City and
13
others, which have subsequently been settled
(see below). The increase in our investing activities during
2001 reflects the increase in our net real estate and facilities
expenditures (see "Stratus' Development Activities" above) and
the $2.0 million investment in the Lakeway project, near Austin
Texas (see "Lakeway Project" below). We received a $1.2 million
distribution from the Lakeway Project during the fourth quarter
of 2001, of which $0.6 million represented our equity earnings in
the project and the remaining $0.6 million represented a partial
return of our original investment. We also received $0.3 million
in distributions from the 7000 West Joint Venture during 2001,
which represented a return of our investment in the joint
venture. Our investing activities during 1999 included a $0.4
million additional investment in the Walden Partnership.
Additionally, our joint ventures' capital expenditures have not
been reflected in the accompanying financial statements, because
our joint ventures' results have been presented using the equity
method of accounting (see Note 1).
Financing activities provided cash totaling $16.7 million in
2001 and used cash totaling $8.4 million in 2000 and $12.9
million in 1999. Our financing activities during 2001 reflect
borrowings of $11.7 million under our amended Comerica credit
facility, $3.5 million of borrowings under our 7500 Rialto Drive
project loan facility and a second $5.0 million unsecured term
loan, offset in part by the $3.2 million repayment of Olympus'
convertible debt (see "Credit Facilities and Other Financing
Arrangements" below). We reduced our net outstanding borrowings
by $8.5 million in 2000 and $12.9 million in 1999. Our net
reductions in outstanding borrowings included proceeds of $0.4
million during 1999 from borrowings on our convertible debt
facility with Olympus (see Note 2).
On October 29, 1999, the City agreed to pay us $9.8 million,
including interest of $1.0 million, as partial payment of our
Circle C MUD reimbursement claim. We received a total of $10.3
million of partial payments from the City on our Circle C MUD
reimbursement claim through December 31, 1999. We received a
total of $7.1 million of additional settlement proceeds from the
City in 2000, including its final settlement payment of $6.9
million (including interest of $0.6 million) in December 2000
(see Note 9). We used all $17.4 million of these proceeds to
reduce our borrowings outstanding under the applicable credit
facilities.
Credit Facilities and Other Financing Arrangements
- --------------------------------------------------
In December 1999, we established a new bank credit facility
with Comerica Bank-Texas, which provided for a term loan and a
revolving line of credit aggregating to $30 million. We borrowed
$20 million under the facility to repay all borrowings outstanding
under our previous credit facility. In December 2000, we used the
proceeds from our Lantana multi-family tract sale (see
"Results of Operations" above) to repay all remaining borrowings
outstanding under the existing Comerica facility and then
negotiated an amended credit facility with Comerica, with improved
terms and a maturity of December 2002. In December 2001, we
established a new bank credit facility with Comerica. Under terms
of the current facility, we have established an expanded $25 million
revolving line of credit available for general corporate purposes and
an additional $5 million loan specifically designed to provide
funding for certain development costs. These development costs
already have been incurred and the development loan proceeds are
available for borrowing at our discretion. The new facility will
mature in April 2004. At December 31, 2001, we had borrowed $12.1
million under the revolving credit facility but had not yet borrowed
any amount under the development loan facility. During February 2002,
we borrowed $7.4 million under our revolving credit facility to
complete transactions that concluded our business relationship
with Olympus (see "Olympus Relationship" below and Note 11).
Under the terms of the Comerica facility, we are required to
carry an interest reserve account with the bank. The amount in
this account must equal the potential debt service for both the
project loan facility and the revolving line of credit for the
ensuing twelve-month period, adjusted quarterly. At December 31,
2001, the amount required to be included in the interest reserve
account totaled approximately $1.6 million. This amount can be
funded directly or treated as a reduction of our availability
under the revolving line of credit. The aggregate availability
under the $25 million revolving line was reduced to $23.4 million
to satisfy the interest reserve requirement at December 31, 2001.
We are able to withdraw amounts funded into the interest reserve
account as needed. Our remaining availability, net of the
interest reserve requirement and borrowings outstanding, under
our credit facility totaled approximately $8 million at
February 28, 2002.
In December 2000, we borrowed $5.0 million under a new five-
year unsecured term loan from First American Asset Management.
In the third quarter of 2001, we obtained an additional $5.0
million five-year unsecured term loan from First American Asset
Management (Note 5). The proceeds of the loans were used to fund
our operations and for other general corporate purposes.
In the second quarter of 2001, we secured an $18.4 million
project loan facility with Comerica for the construction of the
two office buildings at the 7500 Rialto project (see "Stratus'
Development Activities" above). This variable-rate project loan
facility matures in June 2003, with an option to extend the
maturity by one year. Currently our availability under the
project loan is $9.2 million, which is intended for the
construction of the first
14
75,000-square-foot officebuilding and
a related parking garage. At December 31, 2001 we had borrowings
totaling $3.5 million under this project loan facility.
We have pursued various financing arrangements available
through our relationship with Olympus. On September 30, 1998, the
Walden Partnership, an unconsolidated subsidiary in which we
previously owned 49.9 percent (see "Joint Ventures with Olympus
Real Estate Corporation" above and Note 4), entered into an $8.2
million project loan agreement with a commercial bank to fund the
remaining development of the Walden on Lake Houston project. In
October 1998, the Walden Partnership borrowed $6.1 million on
this loan and used the proceeds to repay its outstanding bank
debt associated with land acquisition and development costs
incurred on the project. The Walden Partnership repaid the
remaining $1.7 million of borrowings outstanding under this
project loan during 2001. Under terms of the project loan, we
secured the loan with a restricted cash deposit. All the
remaining restricted cash deposited with the bank, which totaled
$0.6 million at December 31, 2000, was released to us during 2001
as the Walden Partnership loan was repaid.
In April 1999, we and one of our wholly owned subsidiaries
finalized a $6.6 million project development loan facility with
Comerica for the development of the first 70,000-square-foot
office building at the 140,000-square-foot Lantana Corporate
Center (7000 West). In the first quarter of 2000, as manager of
the 7000 West project, we obtained an additional $7.7 million of
availability under the 7000 West development facility to provide
the funding necessary to construct the second 70,000-square-foot
office building at the site. The variable rate, nonrecourse loan
is secured by the approximate 11 acres of real estate at 7000
West and the two completed office buildings and until recently
was guaranteed by us (see "Olympus Relationship" below). The
project loan was scheduled to mature on August 24, 2001.
However, as manager of 7000 West, we successfully negotiated an
extension of the term loan with Comerica to August 24, 2002, with
an option to extend the maturity to August 24, 2003, subject to
certain conditions. Borrowings outstanding under the 7000 West
project loan totaled $12.9 million at December 31, 2001 and $12.0
million at December 31, 2000. Effective February 27, 2002, we
are now required to consolidate this mortgage debt on our balance
sheet as a result of our acquisition of Olympus' 50.1 percent
interest in the 7000 West Joint Venture (see "Olympus
Relationship" below and Note 11). We currently meet all the
conditions necessary to exercise the option to extend the
maturity of the term loan to August 24, 2003, and absent any
negotiations to further extend the term loan, we plan to exercise
our option in July 2002.
Lakeway Project
- ---------------
Since mid-1998, we have provided development, management,
operating and marketing services for the Lakeway project near
Austin, Texas, which is owned by Commercial Lakeway Limited
Partnership, an affiliate of Credit Suisse First Boston, for a
fixed monthly fee. In January 2001, we entered into an expanded
development management agreement with Commercial Lakeway Limited
Partnership covering a 552-acre portion of the Lakeway
development known as Schramm Ranch, and we contributed $2.0
million as an investment in this project. Under the agreement,
we receive enhanced management and development fees and sales
commissions, as well as a net profits interest in the project.
Lakeway project distributions are made to us as sales
installments close. We are currently receiving a 28 percent
share in any Lakeway project distributions and that rate will
continue until we receive proceeds totaling our initial
investment in the project ($2.0 million) plus a stated annual
rate of return, at which time, our share of the Lakeway project
distributions will increase to 40 percent.
During the second quarter of 2001, we negotiated an
agreement to sell the entire Schramm Ranch property to a single
purchaser for approximately $11.0 million, conditioned on
obtaining certain entitlements. As manager of the project, we
obtained subdivision, annexation, zoning and other entitlements
for the first phase of the property. Obtaining these
entitlements allowed for the closing of the sale for the first
phase of the Schramm Ranch property for $1.5 million. The
proceeds from this initial closing were used to obtain the
entitlements necessary to develop the remaining 500-plus acres of
the property. In the fourth quarter of 2001, we secured all the
remaining necessary entitlements for the Schramm Ranch property
and the purchaser closed and funded $3.5 million, representing
the second of four sale installments. In connection with this
second sale installment, the Lakeway Project distributed approximately
$1.2 million to us. We recorded $0.6 million of the distribution as
a partial return of our original investment in the project and $0.6
million as our equity earnings in the project's income for the year,
which was reflected in "Equity in unconsolidated affiliates' income."
We expect the remaining two Schramm Ranch sales installments (totaling
$6.0 million) to occur in March 2002 and June 2002 and we expect to
receive approximately $2 million in future cash distributions
from the Lakeway project.
Olympus Relationship
- --------------------
In May 1998, we formed a strategic alliance with Olympus to
develop certain of our existing properties and to pursue new real
estate acquisition and development opportunities. Under the terms
of the agreement, Olympus made a $10 million investment in our
mandatorily redeemable preferred stock (see Note 3), provided us
a $10 million convertible debt financing facility (see Note 2)
and agreed to make available up to $50 million of additional
capital representing its share of direct investments in joint
Stratus/Olympus projects.
15
During the second quarter of 2001, we repaid Olympus the
entire $3.2 million balance under the convertible debt financing
facility used to finance our interest in the Walden Partnership
in Houston, Texas, purchased in September 1998. Included in the
$3.2 million payment to Olympus was $0.8 million of accrued
interest that had been added to the principal under the terms of
the facility, and which represented the stated 12 percent annual
rate pursuant to the terms of the convertible debt financing
agreement. We also paid an additional $0.3 million of interest
during the third quarter of 2001 to satisfy the minimum annual
rate of return provision within the convertible debt facility
agreement, which provided that if the combination of interest at
12 percent and the value of the conversion right did not provide
Olympus with at least a 15 percent annual return on the
convertible debt, we would pay Olympus additional interest upon
termination of the convertible debt facility in an amount
necessary to yield a 15 percent return. The convertible debt
facility was terminated on August 15, 2001.
Through our subsidiaries, we previously were involved in three
joint ventures with Olympus (see "Joint Ventures with Olympus Real
Estate Corporation"), each was subject to the terms of their
respective partnership agreements. The partnership agreements of
each of the joint ventures contained similar provisions, including
a "buy/sell option" that could be exercised by either Olympus or
us. After Olympus commenced the process under the "buy/sell
option" for each partnership in mid-November 2001 (see Item 3
"Legal Proceedings"), we initiated additional joint discussions
with Olympus about mutually concluding our ongoing business
relationship, including the purchase of our $10.0 million of
mandatorily redeemable preferred stock held by Olympus. As a
result of these efforts, on February 12, 2002, we agreed to a $7.4
million transaction with Olympus that included the following key
provisions:
* We purchased our $10.0 million of mandatorily redeemable
preferred stock held by Olympus for $7.6 million. The amount of
the discount will be recorded as $2.4 million of additional paid
in capital in our consolidated balance sheet in the first quarter
of 2002.
* We acquired Olympus' 50.01 percent ownership interest in the
Barton Creek Joint Venture for $2.4 million.
* We acquired Olympus' 50.1 percent ownership interest in the
7000 West Joint Venture for $1.5 million. In connection with this
acquisition we have assumed the 7000 West debt and accordingly it
will be included in our consolidated balance sheet commencing in
the first quarter of 2002. At December 31, 2001, borrowings
outstanding under this project loan facility totaled $12.9
million.
* We sold our 49.9 percent ownership interest in the Walden
Partnership to Olympus for $3.1 million. We expect to record an
approximate $0.3 million gain on the sale during the first
quarter of 2002.
* We received a total of $1.0 million in net cash from the two
joint ventures we acquired.
The transaction closed on February 27, 2002. See Note 11 for
additional discussion of these transactions, including the pro
forma effects they have on our 2001 results of operations and
our December 31, 2001 balance sheet.
Common Stock Matters
- ---------------------
In February 2001, our Board of Directors authorized an open
market stock purchase program for up to 0.7 million shares of our
common stock representing approximately 10 percent of our
outstanding common stock, after considering the effects of the
stock split transactions described in the following paragraph.
The purchases may occur over time depending on many factors,
including the market price of our common stock; our operating
results, cash flows and financial position; and general economic
and market conditions. We have yet to make any open market share
purchases under this program as of March 19, 2002 and we are
unlikely to make significant open market purchases in the near
future.
On May 10, 2001, our shareholders approved an amendment to
our certificate of incorporation to permit a reverse 1-for-50
common stock split followed immediately by a forward 25-for-1
common stock split. The effective date of this transaction was
May 25, 2001. This transaction resulted in our shareholders
holding fewer than 50 shares of common stock having their shares
converted into less than one share of our common stock in the
reverse 1-for-50 split. Those shareholders received cash
payments equal to the fair value of those fractional interests.
Our shareholders holding more than 50 shares of our common stock
had their number of shares of common stock reduced by one-half
immediately after this transaction. Shareholders holding an odd
number of shares were entitled to a cash payment equal to the
fair value of the resulting fractional share. The fair value of
the fractional shares was calculated by valuing each outstanding
share of Stratus common stock held at the close of business on
the effective date at the average daily closing price per share
of Stratus' common stock for the ten trading days immediately
preceding the effective date. Accordingly, we funded $0.5
million into a restricted cash
16
account to purchase approximately
42,000 shares of our common stock. As of December 31, 2001,
fractional shares representing approximately 21,000 shares of our
common stock had been purchased for $0.25 million. We expect
this transaction to lower our future reporting and related costs.
Outlook
- --------
Our future operating cash flows and, ultimately, our ability
to develop our properties and expand our business will be largely
dependent on the level of our real estate sales. In turn, these
sales will be significantly affected by future real estate market
conditions in the area of our properties, regulatory issues,
development costs, interest rate levels and our ability to
continue to protect our land use and development entitlements.
As discussed in "Risk Factors" located elsewhere in this
Annual Report on Form 10-K, our financial condition and results
of operations are highly dependent upon market conditions in
Austin. Currently the Austin real estate market has experienced
a slowdown, which has affected and will likely continue to affect
our near-term results. We cannot at this time project how long
or to what extent this current slowdown will last in Austin.
Significant development expenditures must be incurred and
permits secured for certain of our Austin area properties prior
to their eventual sale. In June 2000, the Texas Supreme Court
ruled that the legislation creating water quality protection
zones was unconstitutional (see Item 3. "Legal Proceedings").
This decision primarily affects development of the southern
portion of our Barton Creek property. We have initiated plans
that will meet development requirements under existing laws and
regulations. Certain of our properties benefit from grandfathered
entitlements that are not subject to the development requirements
currently in effect. We continue to have a positive and
cooperative dialogue with the City concerning land use and
development permit issues.
We are continuing to pursue additional development and
management fee opportunities, both individually and through our
existing relationships with institutional capital sources. We
also believe that we can obtain bank financing at a reasonable
cost for developing our properties. However, obtaining land
acquisition financing is generally expensive and uncertain.
DISCLOSURES ABOUT MARKET RISKS
We derive our revenues from the management, development and
sale of our real estate holdings. Our net income can vary
significantly with fluctuations in the market prices of real
estate, which are influenced by numerous factors, including
interest rate levels. Changes in interest rates also affect
interest expense on our debt. At the present time, we do not
hedge our exposure to changes in interest rates. Based on the
bank debt outstanding at December 31, 2001, a change of 100 basis
points in applicable annual interest rates would have an
approximate $0.3 million impact on year 2002 net income.
ENVIRONMENTAL
Increasing emphasis on environmental matters is likely to
result in additional costs. Our future operations may require
substantial capital expenditures, which could adversely affect
the development of our properties and results of operations.
Additional costs will be charged against our operations in future
periods when such costs can be reasonably estimated. We cannot at
this time accurately predict the cost associated with future
environment obligations.
CAUTIONARY STATEMENT
Management's Discussion and Analysis of Financial Condition
and Results of Operations and Disclosures about Market Risks
contains forward-looking statements regarding future
reimbursement for infrastructure costs, future events related to
financing and regulatory matters, the expected results of our business
strategy, and other plans and objectives of management for future
operations and activities. Important factors that could cause
actual results to differ materially from our expectations include
economic and business conditions, business opportunities that may
be presented to and pursued by us, changes in laws or regulations
and other factors, many of which are beyond our control, and
other factors that are described in more detail under "Risk Factors",
located in Item 1.
17
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
REPORT OF MANAGEMENT
Stratus Properties Inc. (Stratus) is responsible for the
preparation of the financial statements and all other information
contained in this Annual Report. The financial statements have
been prepared in conformity with accounting principles generally
accepted in the United States and include amounts that are based
on management's informed judgments and estimates.
Stratus maintains a system of internal accounting controls
designed to provide reasonable assurance at reasonable costs that
assets are safeguarded against loss or unauthorized use, that
transactions are executed in accordance with management's
authorization and that transactions are recorded and summarized
properly. The system is tested and evaluated on a regular basis
by Stratus.
Our independent public accountants, Arthur Andersen LLP,
conduct annual audits of our financial statements in accordance
with auditing standards generally accepted in the United States,
which include the review of internal controls for the purpose of
establishing audit scope, and issue an opinion of the fairness of
such statements in accordance with accounting principles
generally accepted in the United States.
The Board of Directors, through its Audit Committee composed
solely of independent non-employee directors, is responsible for
overseeing the integrity and reliability of Stratus' accounting
and financial reporting practices and the effectiveness of its
system of internal controls. Arthur Andersen LLP meets regularly
with, and has access to, this committee, with and without
management present, to discuss the results of their audit work.
William H. Armstrong III
Chairman of the Board,
President
and Chief Executive Officer
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF STRATUS PROPERTIES
INC.:
We have audited the accompanying balance sheets of Stratus
Properties Inc. (a Delaware Corporation) as of December 31, 2001
and 2000, and the related statements of income, cash flows and
changes in stockholders' equity for each of the three years in
the period ended December 31, 2001. These financial statements
are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing
standards generally accepted in the United States. Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of Stratus Properties Inc. as of December 31, 2001 and 2000, and
the results of its operations and its cash flows for each of the
three years in the period ended December 31, 2001, in conformity
with accounting principles generally accepted in the United
States.
/s/ Arthur Andersen LLP
Austin, Texas
February 4, 2002 (Except with respect to
Note 11, as to which the
date is February 27, 2002)
18
STRATUS PROPERTIES INC.
BALANCE SHEETS
December 31,
---------------------
2001 2000
--------- ---------
(In Thousands)
ASSETS
Current assets:
Cash and cash equivalents, including
restricted cash of $0.2 million and
$0.6 million, respectively (Notes 4 and 8) $ 3,705 $ 7,996
Accounts receivable 695 596
Current portion of notes receivable
from property sales 45 -
Prepaid expenses 73 218
--------- ---------
Total current assets 4,518 8,810
Real estate and facilities, net (Note 6) 110,042 93,005
Investments in and advances to
unconsolidated affiliates (Note 4) 8,005 7,596
Notes receivable from property sales, net
of current portion (Note 1) 4,083 -
Other assets, including related party
receivables (Note 4) 2,830 2,482
--------- ---------
Total assets $ 129,478 $ 111,893
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 2,482 $ 1,920
Accrued interest, property taxes and other 1,895 1,486
--------- ---------
Total current liabilities 4,377 3,406
Long-term debt (Note 5) 25,576 8,440
Other liabilities (Note 9) 3,002 3,419
Deferred revenues, including related 1,864 5,548
parties (Note 4)
Commitments and contingencies (Note 9)
Mandatorily redeemable preferred stock (Note 3) 10,000 10,000
Stockholders' equity:
Preferred stock, par value $0.01, - -
50,000,000 shares authorized and unissued
Common stock, par value $0.01,150,000,000 shares
authorized, 7,155,077 and 14,298,270 shares
issued and outstanding, respectively 72 143
Capital in excess of par value of common stock 176,658 176,465
Accumulated deficit (91,588) (95,528)
Common stock held in treasury, 42,229 shares
at cost (483) -
--------- ---------
Total stockholders' equity 84,659 81,080
--------- ---------
Total liabilities and stockholders' equity $ 129,478 $ 111,893
========= =========
The accompanying notes are an integral part of these financial
statements.
19
STRATUS PROPERTIES INC.
STATEMENTS OF INCOME
Years Ended December 31,
----------------------------
2001 2000 1999
-------- -------- --------
(In Thousands, Except Per
Share Amounts)
Revenues (Note 1) $ 14,829 $ 10,099 $ 15,252
Costs and expenses:
Cost of sales, net (Note 1) 9,110 10,013 9,739
General and administrative expenses 2,925 3,735 3,507
-------- -------- --------
Total costs and expenses 12,035 13,748 13,246
-------- -------- --------
Operating income (loss) 2,794 (3,649) 2,006
Gains on settlement of Circle C municipal
utility district infrastructure
reimbursement claim (Note 9) - 14,295 -
Interest expense, net of capitalized interest (456) (1,280) (789)
Interest income 1,157 1,203 1,344
Equity in unconsolidated affiliates'
income (Note 4) 207 1,372 307
Other income, net (Note 9) 238 2,677 133
-------- -------- --------
Income before income taxes and equity in
unconsolidated affiliates 3,940 14,618 3,001
Income tax provision - (396) (130)
-------- -------- --------
Net income $ 3,940 $ 14,222 $ 2,871
======== ======== ========
Net income per share of common stock:
Basic $0.55 $1.99 $0.40
===== ===== =====
Diluted $0.48 $1.74 $0.35
===== ===== =====
Average shares outstanding:
Basic 7,142 7,148 7,144
===== ===== =====
Diluted 8,204 8,351 8,114
===== ===== =====
The accompanying notes are an integral part of these financial
statements.
20
STRATUS PROPERTIES INC.
STATEMENTS OF CASH FLOW
Years Ended December 31,
---------------------------
2001 2000 1999
-------- -------- --------
(In Thousands)
Cash flow from operating activities:
Net income $ 3,940 $ 14,222 $ 2,871
Adjustments to reconcile net income
to net cash provided by operating activities:
Depreciation and amortization 133 129 87
Cost of real estate sales 5,928 1,369 10,018
Equity in income of unconsolidated affiliates (207) (1,372) (307)
Recognition of previously deferred gains (3,684) (2,079) (327)
Gain from previously deferred Circle C
municipal utility district reimbursements - (7,430) -
Reduction of other liabilities (Note 9) - (2,140) -
(Increase) decrease in working capital:
Accounts receivable and prepaid expenses 1 1,966 600
Accounts payable, accrued liabilities
and other 1,168 839 (7)
Proceeds from Circle C municipal utility
district reimbursements - 10,262 -
Long-term receivables (4,036) 8,210 (3,631)
Distribution of unconsolidated
affiliates' income 969 1,384 -
Other (967) 2,823 1,044
-------- -------- --------
Net cash provided by operating activities 3,245 17,921 20,610
-------- -------- --------
Cash flow from investing activities:
Real estate and facilities (23,097) (5,447) (8,554)
Return of investment in
unconsolidated affiliates 829 - -
Investment in Lakeway Project (2,000) - -
Investment in Walden Partnership - - (376)
-------- -------- --------
Net cash used in investing activities (24,268) (5,447) (8,930)
-------- -------- --------
Cash flow from financing activities:
Borrowings (repayments) on credit
facilities, net 11,683 392 (27,118)
Proceeds from term loans 5,000 5,000 20,000
Repayments of term loans - (13,852) (6,143)
Proceeds from construction loan facility 3,496 - -
Proceeds from the exercise of stock options 35 18 -
Repayment of convertible debt facility (3,240) - -
Proceeds from convertible debt facility - - 376
Purchases of Stratus' common stock, at cost (242) - -
-------- -------- --------
Net cash provided by (used in)
financing activities 16,732 (8,442) (12,885)
-------- -------- --------
Net increase (decrease) increase in
cash and cash equivalents (4,291) 4,032 (1,205)
Cash and cash equivalents at
beginning of year 7,996 3,964 5,169
-------- -------- --------
Cash and cash equivalents at end of year $ 3,705 $ 7,996 $ 3,964
======== ======== ========
Interest paid $ 2,396 $ 1,631 $ 1,716
======== ======== ========
Income taxes paid $ 171 $ 142 $ 14
======== ======== ========
The accompanying notes, which include information in Notes 2, 4,
7 and, 9 and 10 regarding noncash transactions, are an integral
part of these financial statements.
21
STRATUS PROPERTIES INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
Capital
in Common
Excess Stock
Preferred Common of Par Accumulated Held in
Stock Stock Value Deficit Treasury Total
------- ------- -------- --------- -------- -------
Balance at January 1, 1999 $ - $ 143 $176,447 $(112,621)$ - $63,969
Net income - - - 2,871 - 2,871
----- ------- -------- --------- -------- -------
Balance at December 31, 1999 - 143 176,447 (109,750) - 66,840
Stock options exercised - - 18 - - 18
Net income - - - 14,222 - 14,222
----- ------- -------- --------- -------- -------
Balance at December 31, 2000 - 143 176,465 (95,528) - 81,080
Effective two for one reverse
stock split (Note 8) - (71) 71 - - -
Purchase of 42,299 shares
of Stratus common stock - - - - (483) (483)
Stock options exercised and
other - - 122 - - 122
Net income - - - 3,940 - 3,940
----- ------- -------- --------- -------- -------
Balance at December 31, 2001 $ - $ 72 $176,658 $ (91,588) $ (483)$84,659
===== ======= ======== ========= ======== =======
The accompanying notes are an integral part of these financial
statements.
22
STRATUS PROPERTIES INC.
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Operations and Basis of Accounting. The real estate development
and marketing operations of Stratus Properties Inc. (Stratus), a
Delaware Corporation, are conducted in Austin and other urban
areas of Texas through its wholly owned subsidiaries and, until
February 2002, through certain unconsolidated joint ventures (see
"Investments in Unconsolidated Affiliates" below and Notes 4 and
10). The consolidated financial statements include accounts of
those subsidiaries where Stratus has more than 50 percent of the
voting rights and for which the right to participate in
significant management decisions is not shared with other
shareholders. Stratus consolidates its wholly owned
subsidiaries, which include: Stratus Properties Operating Co.,
L.P.; Circle C Land Corp.; Austin 290 Properties, Inc.; Stratus
Management L.L.C.; Stratus Realty Inc.; Longhorn Properties Inc.;
Stratus Investments LLC and STRS L.L.C. All significant
intercompany transactions have been eliminated in consolidation.
Investment in Unconsolidated Affiliates. Stratus' investment in
less than 50 percent owned joint ventures and partnerships are
accounted for under the equity method in accordance with the
provisions of the American Institute of Certified Public
Accountants (AICPA) Statement of Position 78-9, "Accounting for
Investments in Real Estate Ventures." Stratus owns approximately
a 49.9 percent interest in each of its three unconsolidated
affiliates (Note 4). Stratus' real estate sales to these
entities are deferred to the extent of its ownership interest in
the unconsolidated affiliate. The deferred revenues subsequently
are recognized ratably as the unconsolidated affiliates sell the
real estate to unrelated third parties. Although Stratus serves
as manager for these unconsolidated affiliates, all significant
decisions are either shared with its partner or made entirely by
its partner. Stratus also has a net profits interest in the
Lakeway project, as further described in Note 4, in which its
share of the project's earnings or loss is calculated using the
hypothetical liquidation at book value approach. This approach
compares the value of the investment at the beginning of the year
to that at the end of the year, assuming that the project's
assets were liquidated or sold at book value. The difference
represents Stratus' share of the project's earnings or loss.
Reclassifications. Certain prior year amounts have been
reclassified to conform to the year 2001 presentation. The
earnings per share information and the weighted average shares
outstanding have been retroactively adjusted to reflect the
effect of the stock split, which occurred in May 2001 (see Note
8), for all periods presented.
Use of Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in these financial
statements and accompanying notes. The more significant
estimates include valuation allowances for deferred tax assets,
estimates of future cash flows from development and sale of real
estate properties, capitalization of certain indirect costs, and
useful lives for depreciation and amortization. Actual results
could differ from those estimates.
Cash and Cash Equivalents. Highly liquid investments purchased
with a maturity of three months or less are considered cash
equivalents.
Financial Instruments. The carrying amounts of receivables,
notes receivable, accounts payable and long-term borrowings
reported in the balance sheet approximate fair value. Stratus
periodically evaluates its ability to collect its receivables.
Stratus provides an allowance for estimated uncollectible amounts
if its evaluation provides sufficient evidence that amounts of its
receivable may be uncollectible. Stratus believes all its
outstanding receivables are collectible and no allowances for
doubtful accounts are included in the accompanying balance sheets.
Notes Receivable from Property Sales. In 2001, Stratus received
two notes totaling $4.4 million, related to two undeveloped
property sales whose gross sale price was $5.9 million. The
purchasers made cash down payments in excess of 20 percent of the
sales price at the closing of each transaction. Both notes have
an annual interest rate of 8 percent and mature in 20 06. One
note requires principal and interest payments of $0.2 million per
year, payable monthly; the other note requires quarterly interest
payments and a $1.5 million principal payment in 2004.
Investment in Real Estate. Real estate assets are stated at the
lower of cost or net realizable value and include acreage,
development, construction and carrying costs, and other related
costs through the development stage. Capitalized costs are
assigned to individual components of a project, as practicable,
whereas interest and other common costs are allocated based on
the relative fair value of individual land
23
parcels. Certain
carrying costs are capitalized on properties currently under
active development. Stratus recorded capitalized interest
of $1.4 million in 2001, $1.3 million in 2000 and $1.2 million
in 1999.
In accordance with Statement of Financial Accounting
Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and Long-Lived Assets to be Disposed of" when events
or circumstances indicate that an asset's carrying amount may not
be recoverable, an impairment test is performed. If projected
undiscounted cash flow from the asset is less than the related
carrying amount then a reduction of the carrying amount of the
long-lived asset to fair value is required. Measurement of the
impairment loss is based on the fair value of the asset.
Generally, Stratus determines fair value using valuation
techniques such as discounted expected future cash flows. No
impairment losses are reflected in the accompanying financial
statements.
Depreciation. Office buildings are depreciated on a straight-
line basis over their estimated 30 year life.
Revenue Recognition. Revenues from property sales are recognized
in accordance with SFAS No. 66, "Accounting for Sales of Real
Estate" when the risks and rewards of ownership are transferred
to the buyer, the con